Let us begin our wonderful journey of discovery to find out how the PPACA (Patient Protection and Affordable Care act, commonly known as ObamaCare) is going to work out for you and me and people like us.*
* * *Q: How much are penalties for non-compliance with the ACA’s mandate, and how do they work?
A: You pay whichever is less: (1) The national average of the Bronze plan, or (2) a penalty.
For the penalty, you pay whichever is greater: (a) A dollar amount or (b) a percentage of income, pro-rated by the number of months you were not covered. (So, if the dollar amount were $95 — as itsometimes will be — and you were not covered for three months, the penalty would be $95 / 3 = $31.)
The dollar amount and the percentage of income are both phased in, starting with the Federal taxes you pay for 2014, in 2015. (The dollar amount, at least next year, is almost certainly less than the Bronze plan, even if we don’t have a Bronze plan to look at.) After phase-in, the dollar amount is adjusted for COLA. You pay the penalty at tax time. However, the IRS can’t put a lien or levy on you if you don’t pay the penalty.
This a little more complicated than the story you read in the press, and may cost you more money than you think. Spoiler alert: You could end up paying more than $95, which is the figure everybody quotes. I’m going to focus mostly on what happens next year, before the complete structure of penalties for non-compliance phases in.
Let’s start with the dollar amount. Here’s an example from The Hill:
In 2014, people who choose not to buy insurance and don’t quality for an exemption from the mandate will have to pay a fine of $95. The penalty increases to $695 by 2016, and then rises annually based on a pre-determined formula.
And that’s the figure that stuck in my mind (and possibly chosen for that purpose): $95. Now, The Hill isn’t a bad publication, but specialist publications are more careful. Consumer Reports:
Penalty. If you don’t have health insurance, you’ll have to pay a tax penalty, starting at $95 per individual, $285 per family, or 1 percent of income, whichever is greater, for 2014. (That rises to $695 per individual, $2,085 per family, or 2.5 percent of income in 2016.)
So first off, note that “greater.” If I’m making (say) $35,000 (I wish), that would be — let me check my calculator, just to demonstrate I can work with numbers — $350, which is — dittoez — 368% of $95, or, in the vernacular, “almost four times as much.” Now, I’m lucky enough that neither figure would break me, but what the “pay a fine of $95” talking point, which is everywhere, does show is that most news coverage of the PPACA is written by and for people to whom the difference between two and three-figure sums of money is inconsequential, so keep that in mind as you study and learn more.
Second, I read this in US News, and had some concerns:**
In 2014, the annual penalty will be $95 per adult and $47.50 per child, up to a family maximum of $285 or 1 percent of family income, whichever is greater.
So far so good, but:
“Most people think of it as an annual penalty,” notes Larry Levitt, a senior vice president at Kaiser. “But it is in fact a monthly thing, and you would pay a penalty for any month that you are uncovered.” However, a person may be without coverage for up to three months without triggering the penalty.
Kaiser’s a reasonably good source, and I do tend to assume the worst, so I considered the possibility that the penalty was $95 per month, and after looking at a lot of sources, I couldn’t get a clear answer. So that was pretty frightening.
Fortunately, I was able to find the text of the actual law, so I could read what it says. Here it is, 26 USC § 5000A. I’m going to add a few comments in brackets. All emphasis is mine:
§5000A. Requirement to maintain minimum essential coverage
(a) Requirement to maintain minimum essential coverage
An applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.
(b) Shared responsibility payment [penalty for non-compliance]
(1) In general
If a taxpayer who is an applicable individual [there are exceptions for religious groups, foreign nationals, those in jail, though not, as far as I can tell, for expats, which might be a subject for a different FAQ], or an applicable individual for whom the taxpayer is liable under paragraph (3) [see below], fails to meet the requirement of subsection (a) for 1 or more months, then, except as provided in subsection (e), there is hereby imposed on the [non-compliant] taxpayer a penalty with respect to such failures in the amount determined under subsection (c).
(2) Inclusion with return
Any penalty imposed by this section with respect to any month shall be included with a taxpayer’s return under chapter 1 for the taxable year which includes such month [that is, with your 1040 or whatever].
(3) Payment of penalty
If an individual with respect to whom a penalty is imposed by this section for any month—
(A) is a dependent (as defined in section 152) of another taxpayer for the other taxpayer’s taxable year including such month, such other taxpayer shall be liable for such penalty, or
(B) files a joint return for the taxable year including such month, such individual and the spouse of such individual shall be jointly liable for such penalty.
(c) Amount of penalty
(1) In general
The amount of the penalty imposed by this section on any taxpayer for any taxable year with respect to failures described in subsection (b)(1) shall be equal to the lesser of—
(A) the sum of the monthly penalty amounts determined under paragraph (2) for months in the taxable year during which 1 or more such failures occurred, or
Now comes the penalty option that Consumer Reports missed. You can’t really blame them, since nobody has seen a Bronze plan yet.
(B) an amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends.
(2) Monthly penalty amounts
For purposes of paragraph (1)(A [“the sum of the monthly penalty amounts”]), the monthly penalty amount with respect to any taxpayer for any month during which any failure described in subsection (b)(1) occurred [“applicable individual” doesn’t “maintain” “minimum essential coverage”] is an amount equal to 1/12 of the greater of the following amounts:
“[T]he monthly penalty amount… equal to 1/12” means that, yes indeed, the penalties are pro-rated, since there are 12 months in a year.
(A) Flat dollar amount
An amount equal to the lesser of—
(i) the sum of the applicable dollar amounts for all individuals with respect to whom such failure occurred during such month, or
(ii) 300 percent of the applicable dollar amount (determined without regard to paragraph (3)(C)) for the calendar year with or within which the taxable year ends.
I can’t find a worked example of (A)(i) vs. (A)(ii) just above. I think it means that if the applicable dollar amount (penalty) were equal to $95 * 1 = $95, then I would (or might decide to) pay $95. On the other hand, if I were filing for four dependents (all over 18), which (i) would be $95 * 4 = $380, that would be more than (ii) $95 * 300% ($285), and so I would pay the $285.
(B) Percentage of income
An amount equal to the following percentage of the excess of the taxpayer’s household income for the taxable year over the amount of gross income specified in section 6012(a)(1) with respect to the taxpayer for the taxable year:
(i) 1.0 percent for taxable years beginning in 2014.
(ii) 2.0 percent for taxable years beginning in 2015.
(iii) 2.5 percent for taxable years beginning after 2015.
Remember that you pay the greater of the (A) flat dollar amount vs. (B) the percentage of income.
(3) Applicable dollar amount
For purposes of paragraph (1)—
(A) In general
Except as provided in subparagraphs (B) and (C), the applicable dollar amount is $695.
(B) Phase in
The applicable dollar amount is $95 for 2014 and $325 for 2015.
(C) Special rule for individuals under age 18
If an applicable individual has not attained the age of 18 as of the beginning of a month, the applicable dollar amount with respect to such individual for the month shall be equal to one-half of the applicable dollar amount for the calendar year in which the month occurs.
(D) Indexing of amount
In the case of any calendar year beginning after 2016, the applicable dollar amount shall be equal to $695, increased by an amount equal to—
(i) $695, multiplied by
(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting “calendar year 2015” for “calendar year 1992” in subparagraph (B) thereof.
So, easy peasy!
Finally, here’s a tidbit from the IRS FAQ on ObamaCare:
24. What happens if I do not have minimum essential coverage, and I cannot afford to make the payment with my tax return?
The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any payment you owe related to the individual responsibility provision, if you, your spouse or a dependent included on your tax return does not have minimum essential coverage.
]Leaving open, I suppose, what the IRS is not prohibited from doing. I guess we have yet to find that out.
NOTE * If you’re are not or do not have to be worried about how PPACA will work, you are not, in important ways, like me and probably not like us — at least in the ways that trigger the various forms of PPACA eligibility and penalty determinations; primarily employment and income, but also location, and age.
NOTE ** Translation: Nearly had a heart attack.
NOTE I welcome feedback. Please let me know of errors or corrections I need to make, and I’ll adjust.
EDITORIAL COMMENT Obviously, this is just ridiculously complex. H&R Block and the rest of the tax preparers must be salivating at what they’re going to charge people to figure this stuff out. A much simpler approach would be to lower the age of eligibility for Medicare from 65 to zero. Single payer Medicare for All would save at least $400 billion dollars a year and prevent a lot of suffering, because we wouldn’t be paying health insurance companies to profit by denying people care, which is basic human right.